George K. Chu - Chief Operating Officer and Secretary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the ChinaNet Online Holdings, Inc. Fourth Quarter and Fiscal Year 2012 Earnings Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, April the 17th, 2013. I'd now like to turn the conference over to [John Eli of MC Group] (ph). Please go ahead, sir.

Thank you [Loraine] (ph) and welcome everyone to today's conference call for ChinaNet Online Holdings, Inc. This call will cover ChinaNet's financial and operating results for the fourth quarter and full-year 2012. The earnings press release accompanying this conference call went to the wire this morning, Wednesday, April 17, 2013. On our call today is Mr. Handong Cheng, Chairman and CEO of ChinaNet; Mr. Zhige Zhang, Chief Financial Officer; and Mr. George Chu, Chief Operating Officer. Before we get started, I'll read the disclaimer about forward-looking statements. This conference call may contain, in addition to historical information, forward-looking statements within the meaning of the federal securities laws regarding ChinaNet Online Holdings, Inc. Forward-looking statements include statements about plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements that are different than historical facts. These forward-looking statements are based on current management expectations and are subject to risks and uncertainties that may result in expectations not being realized and may cause actual outcomes to differ materially from expectations reflected in these forward-looking statements. Potential risks and uncertainties include changes in demand for the Company's services, impact of the competition and government regulation, and other risks contained in the statements filed from time to time with the SEC. All such forward-looking statements, whether written or oral, said on behalf of the Company are expressly qualified by these cautionary statements and such forward-looking statements are subject to risks and uncertainties and we caution you not to place undue reliance on these. At this time, I'd like to turn the call over to Mr. George Chu. George K. Chu: Thank you, Johnny. Speaking on behalf of Mr. Cheng, as Mr. Cheng is trying to make his time here, he's on travel but he got stuck himself in a series of car accidents, so that is why he's not with me right now, but he's on the way to this phone conference call because we are doing the conference call in our Company. So, thank you Johnny and thank you everyone for joining us today for our fourth quarter and fiscal year 2012 earnings call. Our strong fourth-quarter results (indiscernible) an extremely successful year for China. We delivered year-over-year revenue growth in all four quarters as a result of continuing investments in new products and marketing as well as the strong value proposition we provide to business entrepreneurs. Our company was founded on the principle of healthy small and medium-sized businesses or enterprises or so-called SME helping to extend their growing sales. Because we now have a successful track record of healthy hundreds of businesses achieved over three to five years, our own brand and credibility continues to increase with time. The environment for SME, also called as small and medium business in China, remains quite challenging. Period is of difficulty combined and their customers are becoming more and more cautious on their spending. However, we are optimistic that our clients will continue to invest in their brands, their sales channels, and their marketing in good and bad times. This is a good news for all of us, especially because we're now providing increasing number of (indiscernible) value-added services for these clients on consistent and (indiscernible) basis. In addition to satisfying our portfolio of services, we have also worked hard to increase our international clients by obtaining franchise for trade shows in Korea, China, Taiwan, and the U.S. In order to meet new prospective customers, we are now further differentiating ourselves from our competitors who are focused excessively on certain local clients in Mainland China. We believe these will become widely successful factors in our favor as more SMEs throughout the world looks to increase their presence in China in the long run. So, to summarize 2012, 2012 was the beginning of what we hope is a year of accelerating growth. Each of our main business line, Internet advertising marketing, brand management and sales channel building, and TV advertising is in a strong and competitive position today than it was three to four years ago. Our focus for 2013 and beyond will be to (indiscernible) the investments we made and expand sales, and more importantly, our margin. That concludes my prepared comments. Thank you for your interest in ChinaNet and myself George will continue to provide an overview of our operating and financial results for the fourth quarter and full year. So, during today's call, I will discuss our fourth quarter and full-year 2012 operating and financial results. Please refer to the earnings press release that was distributed today as well as the 10-K we filed on Monday, April 15 and also this morning we also enclosed a PowerPoint presentation for this conference call. We delivered strong revenue growth and positive net income for the three and 12 months ended December 31, 2012. Sales were higher in each of our core businesses, Internet advertising marketing, brand management and sales channel building services. These two factors reflect the increased number of new and existing clients we have recognizing the value we provide. Total revenue for the fourth quarter of 2012 increased 34% to $8.3 million led by a 70% increase in Internet advertising revenue. Internet advertising revenue were particularly strong in sales lead generating and the cloud-based search-engine optimization and marketing services. SOOE, which he acquired in December 2011, contributed about $1 million to the year-over-year revenue growth in the fourth quarter. Internet advertising account for approximately 73% of total sales, up from 57% in the fourth quarter of 2011. Revenue from TV advertising was $0.7 million compared of $1.7 million compared to the year ago. The year-over-year decline in TV advertising revenue in the fourth quarter really reflects a strategic change that we need for this TV advertising segmentation. Overall, in the long run, particularly for the TV and Internet here, we of course will strive hard to improve the marketing even in the course of simply maintaining these resources exclusively available to us and to our clients. But however, we also believe that non-TV media such as search engine, social media, (indiscernible) like Twitter in United States provide better returns on investment for our clients which will be our long-term developing goal. Revenue from brand management and sales channel expansion jumped from $0.9 million in the fourth quarter of 2011 to $1.5 million in 2012 fourth-quarter, representing a 66% increase. We have increased sales by about 146% over the past 12 months as a result of practical investments in marketing and new product introductions. We believe we are only beginning to scratch the surface in terms of market opportunities in this segment. As we roll out these services to more markets, more regions in China, we expect to grow sales from brand management and sales channel building at a faster rate in our overall sales. Total cost of sales for the fourth quarter of 2012 was $3.1 million compared to $3.2 million for the same period in 2011. Gross profit was $4.8 million for the fourth quarter of 2012, an increase of 60% compared to same period a year ago. We were able to increase our gross margin by 49% in the fourth quarter of 2011 to 40.1% in the third quarter of 2012, to 57.7% in fourth quarter of 2012. The primary reason for the sequential and the year-over-year increase in gross profit margin is high income from advertisements in the brand management and sales channel building which generates significantly higher margins than our other businesses as well as the reduction of lower margin TV advertisement in the fourth quarter of 2012. Operating expenses for the three months ended December 31, 2012 were approximately $3.1 million, down 59% from $7.5 million in the comparable period in 2011. We successfully reduced our expenses across the board, as reflected by a majority of lower general and administrative and sales expenses, in line with our operational excellence program, which will be further continued to be implemented in 2013. In addition, we did not incur the elevated level of stock-based compensation expenses we incurred in the fourth quarter of 2011. Our operating income for the fourth quarter of 2012 was $1.7 million, representing an operating margin of 20.6%, compared to $4.5 million of operating loss in the same period a year ago. Net income attributable to common stockholders for the three months ended December 31, 2012 was $1.2 million and earnings per share was $0.06, compared to negative $3.9 million and minus $0.19 for the three months ended December 31, 2011, respectively. Non-GAAP adjusted net income attributable to common stockholders for the three months ended December 31, 2012 was $1.4 million and adjusted earnings per share was $0.06, compared to minus $1.8 million and minus $0.08 for the three months ended December 31, 2011, respectively. Our balance sheet remains strong. We had $5.5 million in cash and cash equivalents as of December 31, 2012, down from $10.7 million as of December 31, 2011. Working capital was $25.2 million on December 31, 2012 and the current ratio of about 3.5 to 1. Total shareholders’ equity of ChinaNet was $44.2 million at December 31, 2012 compared to $41.7 million at December 31, 2011. We generated approximately $5 million of cash inflows from operations during the 12 months ended December 31, 2012 compared to $0.6 million of cash flow from operating activities for the full year of 2011. On October 15, 2012, our Board of Directors approved $1 million shares purchase program to be executed over the next three months at the Company's discretion and we see probably a more aggressive purchase plan will be set up in May 2013. I will quickly run through our full year 2012 income statement items. Please refer to our earnings press release or our 10-K as well as the PowerPoint presentation for additional details. Sales for the full year of 2012 increased by 62% based on aforementioned 146% increase in brand management and sales channel building. Internet advertising marketing as well as TV advertisement sales increased 7% and 218% respectively. Gross profit was $15 million, gross margin was 32.3% for fiscal year 2012. Net income attributable to common stockholders increased 16% to $3 million or $0.14 per share. Non-GAAP income and EPS were $3.2 million and $0.14 respectively. As we mentioned our specific key achievements earlier, I will also highlight a few other specific growth initiatives that took places in the past six months, gradually from June last year till now. In May last year, we had joining our new CEO to further concrete our technology transition part and expand our service scope. We have participated as a judge and sponsor of 2012 International Youth Innovation Games during December, this in turn supported by government and Ministry of Education to signify support of new innovation by academia, government and private (indiscernible). Liansuo.com, the company subsidiary which focuses on more of the medium sized businesses signed an agreement to help Super 8 International Limited in expanding its franchise outside of the U.S. Super 8 International Limited is a subsidiary of Wyndham Worldwide, it's one of the larger hotel (indiscernible) in the world with more than 2,600 hotels. So Liansuo is one of the segments that we expect will reach breakeven this year. And in addition to this exciting news of Liansuo.com, we also continue to build our international presence by participating in two major international franchise and trade exhibitions, one in the Korea Chain Industry Fair in December 2012 as well as the Franchise Expo in April 13, that's where the Taiwan Franchise Exhibition has participated. I hope that you are able to see the progress we have made on each market. While we are proud of our results for 2012, we are even more excited about opportunities ahead of us. As we stated in our earnings press release, we plan to provide a physical 2013 revenue and net income guidance sometime in May. We appreciate your patience while we work through our budgets for this year. These conclude my remarks. We will now open the call to any questions you may have for the management team.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) Our first question is (indiscernible). Please go ahead.

Good evening. George, I understand you want to postpone the annual guidance to May, but for the moment, can you give us maybe qualitative discussion, what you see regarding Internet advertisement chain, what you see regarding your TV business, and what you see about your branding business? George K. Chu: Thank you [Mr. Cho] (ph). Of course, overall we still expect a revenue growth for Internet advertising marketing, we still feel strong that our customers are still spending very cautiously on account of the overall economy conditions. We also see that the China has released a slowdown or slow growth of the income around 7.8% to 8% per year. So, that would probably impact the small and medium businesses that my company is focusing on. But the overall, we do expect our client base will be growing very aggressively. Maybe the average spending per client will be lower but the client base will be increasing very aggressively from what we used to have about 2,000 about two or three years ago to now we expect that this year we will reach about 20,000 client base. And for TV advertisements, overall we don't expect this business segment to increase that much. The reason we're still holding this business is as everyone knows that in 2011, the management made a decision of reducing TV minutes, but however this decision was somehow not very efficient and effective decision because we realized that the TV resources are very difficult to get and those once you don't continue this resource relationship, further down the road, it will be extremely hard to get back or you might be able to get back at extremely high costs. So for the time being, we will be try to maintaining the TV advertisements at a margin improving situation, but we are not going to reduce much of the TV advertisements unless it creates a tremendous loss to the business. And also the reason that we are maintaining this business is also we want to integrate these businesses further deeply with our marketing for the client acquisition events that we will be conducting within the next six to nine months. And for the brand management, this business, when we compare the overall revenue contribution, this business segment is still small and this year we want to really review our clients and make some adjustments as we want to have more quality clients than have many clients. In this segment, I think most of the businesses were of (indiscernible) clients (indiscernible) and (indiscernible) case are build around a number of factors which I'm not going to elaborate at this point in time because it might take a while, but overall these business segments will either maintain the current – will be growing but will be growing at a slower rate than last year. So that's the overall qualitative view of our businesses. And also of course the Internet segmentation this year, I want to also mention that we will be very aggressively moving into the mobile advertising which we have been prepared for over almost a year, and I think in the next one or two months, you will see some exciting news or release by the Company.

Okay, and in terms of the buyback, you mentioned in your script the $1 million buyback, is that started or not, and also you said from May you will have another more aggressive program, can you elaborate? George K. Chu: Yes. We mentioned, we already after we decided the Board has approved, and somehow we already fall into the – we are not qualified to enter the windows, so the Company will not buy much of the shares, okay. But we (indiscernible) a great deal of buying back [clients] (ph) which will be executed regardless of the windows, buying back windows, because right now the Company or the management cannot do any buyback, we won't be able to do anything until our Q1 releases. So, that means after the Q1 releases, we have at least about a month of window, we will have a proper plan for execution for the rest of the year. So, this plan will not be bound or limited by any form. I think that's what called (indiscernible) or something.

Okay, and in terms of mobile, can you elaborate somewhat there? George K. Chu: Yes.

I think previously you mentioned some collaboration with (indiscernible). George K. Chu: Yes, yes, yes, that one is still going on and we have integrated services and I'm going to send you a sample PowerPoint in United States – one second – what we are doing right now, we are not really customizing, we are forming a platform that's already established based on technology we purchased a year ago, it's a cloud-based technology, so what happens is all the small and medium enterprises, they just follow the process to build up and to fill in all the information and at the end of the process, the system will automatically produce an app as well as a mobile-based web page for browsing and that is very similar to a company in the United States called theappbuilder.com.

Okay George K. Chu: As well as the [pmobilelite.com] (ph). We have a very different, not very different concept, the concept is pretty much the same, but what we do is that we customize specific to the local present situation, we make things look much more simpler and much easier to use. If you want more information (indiscernible) in April 30, we'll be very happy to provide the web page for the product that you can see.

Our next question is [Gary Christen] (ph), a stockholder. Please go ahead, sir.

Can you comment on your increased accounts receivable for 2012, and can you add some color to your participation with the international franchises and if you assigned any clients as a result of participation in the Taiwan Franchise Expo as well as the Korean Franchise Expo? George K. Chu: So, referring to your first question, as we have explained earlier, that the overall credit conditions, the overall economy somehow is still a little bit difficult for small and medium businesses in China. So that's why the spending with that becomes lower because the customer spending is lower and much more cautious which has lowered down our accounts receivable turnover. So that's why we see right now the increasing of accounts receivables. For the Company, as you see in the presentation, till June 30, we will be very aggressively increasing the collectability of our accounts receivables as we have a plan for this cash for the additional potential acquisition of new technologies. And I also referred to the international trade shows, for Taiwan which I led a team of five people attending the exhibition show which we'll send the link out very soon tomorrow, actually press release went yesterday afternoon, and we also have a link which we will put on the website after today's conference call that we have engaged one of the most popular bubble tea chain store in the world right now is called CoCo. CoCo Fresh Juice & Tea, it's a bubble tea store which has few in United States, one is in the Lexington, around 56th and 57th, I think that's the right address, and globally they have about 1,200 stores and they have about 900 right now in China, and we have engaged with them to help them speed up the process. And also a number of the other tea shop stores in Taiwan. For Korea, we have engaged a cosmetic store that wish to expand into China. At this point in time, I'm not in a position to mention the name, but we are very excited about these opportunities. So fundamentally, we have like in the Taiwan Exhibition, we have actually engaged about 18 clients and we hope to sign about 10 of them. In Korea, we have only actually, we have engaged about 10 of them which we feel like their operation model can be easy expanded in China, but so far we have one engagement right now.

(Operator Instructions) Having no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks. George K. Chu: Thank you gentlemen for your time today and on behalf of the company, we thank you for your support in such economic situation, and also on behalf of the management, we keep great sympathy to the incident happened in Boston which is a great tragedy. However, I hope all investors remain confident about the Company as we will be going into a very exciting time. Thank you and thank you for your support and have a good day.

Thank you. The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.